Eric Ries, US start-up veteran (age 32) and author of The Lean Startup: How Constant Innovation Creates Radically Successful Businesses  spoke to 500 or so mostly UK entrepreneurs and associated hangers on (like me) at the Mermaid Theatre in London on a Monday night in January. He certainly attracted a big crowd, so I was later relieved that a couple of very experienced technology funding buddies had never heard of him either.

He was engaging, self-effacing and did not trigger any “how many times is he going to mention his book?” tweets. Keeping things moving was his host, the refreshingly non-sycophantic Mark Littlewood of BLN (Business Leaders’ Network).

Most good advisors make their advice seem obvious, except you never thought about it that way before, and that’s exactly what Eric did. I’m not a great business book reader (I’m grinding to a halt at page 40 or so) but if you like this sort of stuff, and in particular you want some talesof real start up triumphs and mistakes then take a look at his book.

Management is not a boring option, it is key. Creating a start-up can be done in a large corporation or public entity as well as by an entrepreneur creating a business from scratch. Techniques which we take for granted today in manufacturing, but which were cutting edge a century ago, now need to be applied to start-ups.

Uncertainty defines a start-up

So if start-ups don’t have to be a couple of geeks in a garage, what defines them? Traditional corporate project success is defined by being ahead of plan. But this is only possible if you can accurately forecast. Successful start ups don’t have the best ideas, they are just able to prevent themselves flying into a hillside when they hit difficulty. They pivot, to use a favourite entrepreneur term. They keep the vision, but change the strategy. His three examples were Microsoft’s shift from BASIC interpreters into OS, PayPal from PDA payments to eBay, and Flickr’s gaming to photo and video hosting.

Back in 1911

Classical industrial management is all about maximising constrained production capacity. The father of “management”, Frederick Winslow Taylor, worried about production volumes and cost of production, and if you achieved these then selling your product was the least of your problems.

Productive capacity is not the problem now. The problem is all the time and effort that is wasted by failing start-ups, a fact borne out by the dismal venture capital industry returns cited by Jon Moulton in my last blog.

We’re all individuals (I’m not)

Before the science of management became the norm, industrial success was seen as being driven by “great men”. In an age of star technology founders, this sounds familiar. But Ries states that this is just a symptom of the lack of start-up management techniques. Judging from the queue of entrepreneurs wanting Ries to join their boards, his warning about the “great man” theory of management is going unheeded. All of this rings true to me. We all know successful founders who then failed with their second, usually far better funded, start-up. One of my key red flags when talking to start-ups is that they place too much emphasis on some key business figure who they have persuaded to become chairman or invest in the company (apart from me of course).

His advice is to bring some discipline into your start up, “manage” its evolution: constantly test the product, measure customer behaviour ( not what they say), tune the engine through experiment, respond instantly to signals that something is wrong rather than waiting for the end of the test period, and if wondering whether to pivot, do so.

Innovation accounting means build a minimum viable product then see how customers behave. Business plans mean nothing especially if a spurious market share or customer penetration figure buried in the middle of the spread-sheet turns out to be the hinge on which the whole project depends. He then walked through some of these points in detail:

The fallacy of learning from mistakes

There is nothing good about successfully executing a bad plan, or “achieving failure”. Eric told an amusing anecdote about weeks of effort going into a website and downloadable software. The team were extremely nervous about the product as they had stuck to a time, rather than quality deadline. In the end, no-one downloaded it anyway. An hour’s work on a home page with a big download button on it, linked to a “enter your details here and we’ll email you when it’s ready” would have saved weeks of work. It wasn’t a product anyone wanted anyway.

The team comforted themselves that this was a learning experience, but the learning should have come first, in Ries’ opinion. If the first 10 guinea pig customers say it sucks, you won’t learn anything from the next 90.

Minimise the learning loop

So, your start-up needs to rapidly iterate through an idea-build-code-measure-data-learn-idea… cycle. It is no use if your coders say they could code faster if they could skip the “measure” stage. You can’t skimp on any stage of the process. In his book he talked about fast product development with samples of customers getting different versions of the product to test their acceptance. And critically, it is customer behaviour, not what they say, that counts in the measurement phase.

The importance of accounting

I admit as a chartered accountant I felt tingle in the spine at this apparent seal of approval on the profession, though I admit what he subsequently said didn’t tie in that well with the three years of professional examinations I endured all those years ago.

Whatever happens in a start-up, money gets spent. When funds run out…..

But for the funders of your project, you may as well have spent the money on a holiday. They have nothing to show for it.

Innovation accounting means throw away the blue-sky business plan (remember the whole point is that start ups exist in an uncertain environment) and instead define and build a baseline, minimal, product and get working on the measure-data-learn- cycle. What percentage of customers are signing up now? Then experiment, tune the product, and see what improves the baseline.

Pivot or persevere? Pivot!

If the numbers start to trend the wrong way, showing diminishing returns, then pivot. If you are wondering whether to pivot, it is time to pivot. But pivot decision meetings are depressing affairs, occurring as they do when everything is caving in. So have your pivot meetings regularly and well in advance of signs of trouble.

Business Leaders’ Network

Finally a thanks to Mark Littlewood of BLN  who so ably hosted the event and seemed to know the name and background of just about everyone in the audience who asked a question. Great event.